What is the difference between a health savings account (HSA) and a flexible spending account (FSA)? Is one better than the other?

Both allow you to save money tax-free for out-of-pocket medical expenses such as prescription drugs, eye glasses, etc. and the money you save is not part of your taxable income. However, there are some key differences:

Flexible spending accounts:
Contributions to a flexible spending account are deducted from your paycheck, pre-tax, with a maximum individual contribution of $2,600 per year. If you do not spend all of the money in your FSA by the end of the year, you may lose the remaining balance. Because of this, you must estimate the amount you will need for the entire year, which can be hard to predict. An advantage of an FSA is that your full balance for the year will be available January 1st, even before the monthly contributions are made.

Health savings accounts:
A health savings account will allow you to store away more money than an FSA, and your unused funds will carry over year-to-year. You can also take your HSA with you if you leave your job, and enjoy tax-free withdrawals for qualified medical expenses (there are some penalties if funds are used for other purposes). The downside of this system is that in order to contribute to an HSA, you must have a high annual deductible (at least $1,300 for individual coverage). For a list of administrators, visit http://www.hsasearch.com.

The best option for you will depend on a few factors – if you are self-employed with a high insurance deductible, will be changing jobs, or have unpredictable health-care costs, then an HSA could be a good option. However, if you will be paying for more predictable costs like contact lenses and copays for regular medication, then an FSA might be the way to go. Ultimately, it comes down to your financial situation, health, and job status, as well as the plans that your company may offer.

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